Okun's law

The Okun's law (also Okun law ) describes the correlation between output growth and unemployment in an economy that was first described by Arthur Melvin Okun ( 1928-1980 ) studied using economic data from the United States. The gist of the law is that a goes beyond a certain rate growth, normal production growth or employment threshold called, accompanied by a decline in the unemployment rate. If economic growth is lower than the normal production growth, the unemployment rate rises.

Together with the Phillips curve and the aggregate demand function describes the Okun's Law, the interaction between the economic factors of production growth, money growth and unemployment.

Alternative definition

An alternative approach of Okun's Law states that fluctuations in real gross domestic product ( GDP) by its trend with an opposite variation in the unemployment rate to its equilibrium value ( natural rate of unemployment ) are connected. The unemployment rate rises when economic growth slows down, and decreases when it is accelerating.

Empirical observation of Okun based on an application example

Okun observed in the examined period he (1954-1962) that a production growth above a certain rate was accompanied by a reduction in the unemployment rate. Lag growth but below this rate, unemployment increased. The point at which the reversal of the trend is called normal production growth or employment threshold. This is the growth rate at which the unemployment rate remains constant under ceteris paribus conditions.

For the period 1961 to 2007 results, for example for the United States between the output growth in the year and the change in the annual rate of unemployment following relationship:

This only leads a growth that exceeds the normal production growth of 3.29%, a reduction in the unemployment rate. Each additional percentage point of growth reduces the unemployment rate by 0.36 percentage points. Clearly says the Okun's law for a growth rate of 5 % requires a reduction in the unemployment rate by 0.6 percentage points.

The reverse interpretation of Okun's law that a reduction in unemployment is accompanied by an increase in production growth, is regarded as controversial.

Mathematical formulation

If the unemployment rate of the current year and the unemployment rate of the previous year is, the general formulation of Okun's Law:

The coefficient is the slope of the regression line and thus describes the relationship between output growth and the change in the unemployment rate. He provides information about the sensitivity of the unemployment rate on economic growth. , The intersection of the regression line with the x- axis represents the growth in production, from the decreases unemployment. Each percent growth above the normal production growth leads to a reduction in the unemployment rate percentage points. is the percentage change in real GDP from the previous year to the current year.

Explanation of the parameters

The mathematical formulation of Okun's law has two main parameters, and. This will be explained using the example of Germany.

Factors affecting the normal production growth

The fact that a positive economic growth does not automatically have a declining unemployment crisis, various reasons may have. Thus grew from 2004 to 2005, the number of workers by about 1%. This would also have to work at least 1% increase, so that the unemployment rate remains constant and does not increase. An increase in employment in turn requires an increase in production.

In addition, the productivity of workers increases continuously. So she took 2005 compared to the previous year by 1.3%. To deal with the same amount of labor, so that the production would therefore have to be increased by at least 1.3 %.

Together this would result for the year 2004 to 2005, a necessary increase in production by at least 2.3%, the unemployment rate does not increase.

Β factors influencing the coefficient

A growth increase production to normal levels does not always lead to a reduction in the unemployment rate to the same extent. This can have several causes. For one does not automatically result a corresponding reduction of the labor force of a fall in production. Hires are associated with increased costs, so companies sometimes prefer to retain workers in periods of reduced production. If, on the other hand to new hires, this leads not to the same extent to the reduction of unemployment. Due to the improved situation on the labor market apply additionally individuals who were not part of the labor force earlier. In such a case, the official unemployment rate is not reduced, as the relevant person was not previously registered as jobseekers. This accounts for only a part of the new posts to be filled in order to reduce the unemployment rate, which corresponds to a value of less than 1.

Okunsches law across countries

The parameters of the Okun's law are different from country to country and change over time. So you can see for the Western industrialized nations that has risen. This means that companies in these countries react today with a more flexible recruitment policy to fluctuations in demand. has been reduced then against, so even at lower growth rates new jobs will be created. Another reason for the decline in employment threshold is the decline of population growth. With population growth of 1%, as was common in many industrialized countries in the 60s, the production will have 1 % faster than a stagnant population growth, so that unemployment is reduced.

Critical review

Rudiger Dornbusch and Stanley Fischer seems to be the formulation of the observed by Arthur M. Okun relationship as "law" exaggerated, because the empirical relationships are fraught with a large degree of uncertainty. The parameter values ​​vary over time and the observed relations are sometimes unstable. In addition, the normal production growth can not be determined directly but must be estimated. Fischer makes this approach compared to the nominal contracts.

Wilhelm Lorenz, professor of economics, refers to the sizes productivity, working hours and labor supply, " interfere with the direct relationship between unemployment and economic growth. In fact, changes in these variables and the institutional conditions for extended periods have a significant influence on the described parameters. "

Nevertheless, the Okun's law provides an appropriate tool to assess the impact of economic growth on the reduction of unemployment in an economy. The simple linear relationship it enjoys a high reputation, especially in economic policymakers. In addition, the Okun's law provides significant figures to the state of an economy and a way to predict the future changes in the unemployment rate.